Managerial Economics Sahid Pasca the Fundamentals of Managerial Economics

8/4/2019 Managerial Economics Sahid Pasca the Fundamentals of Managerial Economics

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The Fundamentals OfMana erial Economics

Ir. Muhril A., M.Sc., Ph.D. 1

The Fundamentals OfManagerial Economics

http://mesahid.wordpress.com/


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Task:Read: Chapter 1, The Fundamentals Of

Managerial Economics.

Page 1 - 33


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Many students taking managerialeconomics ask:

Why I should I study economics?

Will it tell me what the stock market willdo tomorrow?

Will it tell me where to invest my moneyor how to get rich.


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The Manager

A person who directs resources toachieve a stated goal.


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Economics

The science of making decisions in thepresence of scare resources.


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Managerial Economics Defined

The study of how to direct scarceresources in the way that most efficiently

achieves a managerial goal.


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The Economics Of Effective

Management

At least an effective manager must:

1. Identify goals and constraints.

2. Recognize the nature and importance ofprofits.

3. Understand incentives.

4. Understand markets.5. Recognize the time value of money.

6. Use marginal analysis.


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Identify Goals And Constraints

Have well defined goals.

Face constraints.


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Recognize The Nature And

Importance Of Profits

The overall goal of most firm is to

maximize profits or the firms value.

Economic profits (p):

The difference between total revenue

(TR) and total opportunity cost (TC).


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p = TR TC

TR = P . Q

TC = TFC + TVC

p = profitTR = total revenue

P = price of output

Q = quantity sold of output

TC = total cost

TFC = total fixed cost

TVC = total variable cost


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Importance Of Profits (continued)

Opportunity cost:

The cost of the explicit and implicit

resources that are forgone when adecision is made.


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The five forces framework and industryprofitability:

1. Entry.2. Power of input suppliers.

3. Power of buyer.

4. Industry rivalry.

5. Substitutes and complements.


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The five forces framework and industry profitability:

Entry (1st)::

- Entry costs.

- Speed of adjustment.- Sunk costs.

- Economies of scale.

- Network effects.

- Reputation.

- Switching costs.

- Government restraints.


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Power of input suppliers(2nd

)::- Supplier concentration.

- Price/productivity of alternative inputs.

- Relationship specific investments.

- Supplier switching costs.



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Power of Buyers(3rd)::

- Buyer concentration.

- Price/value of substitute products or

services.

- Relationship specific investment.- Customer switching costs.



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Substitutes and complements(4th)::

- Price/value of surrogate products or

services.

- Price/value of complementary products

or services.- Network effects.



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The five forces framework and industry profitability:

Industry rivalry(5th)::

- Concentration.

- Price, quantity, quality, or servicecompetition.

- Degree of differentiation.

- Switching costs.

- Timing of decisions.- Information.



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Understand Incentives

Incentives affect how resources are usedand how hard workers work.

No reward for working hard? and incursno penalty if he fails to make soundmanagerial decisions?


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Understand Markets:

1. Consumer-Producer Rivalry.

- Consumers attempt to negotiate or

locate low prices.

- Producers attempt to negotiate high

prices.


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Understand Markets

(continued):

2. Consumer-Consumer Rivalry.

- When limited quantities of goods are

available, consumers will compete

with one another for the right to

purchase the available goods.

- An example: auction.


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Understand Markets

(continued):

3. Producer-Producer Rivalry.

- Given that consumers are scarce,

producers compete with one another

for the right to service the customers

available.


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Understand Markets

(continued):

4. Government And The Market.


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Use Marginal Analysis

Marginal analysis:

States that optimal managerial decisions

involve comparing the marginal benefitsof a decision with the marginal costs.


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Marginal Revenue (MR):

The change in Total Revenue (TR) arising froma change in the managerial control variableOutput (Q).

MR = D TR /D QMR = marginal revenueTR = total revenue = P. Q

P = priceQ = outputD = change


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Marginal Cost (MC):

The change in Total Cost (TC) arisingfrom a change in the managerial controlOutput (Q).

MC = D TC /D Q

MC = marginal cost

TC = total cost

Q = output


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Maximum Profit:

MC = MB

Figure 1-2 Page 23.


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Q(output)

(1)

TR (TotalRevenue)

(2)

TC (TotalCost)

(3)

Profit

(4)

MR(MarginalRevenue)

(5)

MC(MarginalCost)

(6)

MP(MarginalProfit)

(7)

0 0 0 0 - - -

1 90 10 80 90 10 80

2 170 30 140 80 20 60

3 240 60 180 70 30 40


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Case:

An engineering firm recently conducted a study to determine

its revenue and cost structure. The results of the study are

as follows:

TR(Q) = 300 Q 6 Q2

TR = Total Revenue

Q = Output

TC(Q) = 4 Q2

TC = Total Cost

Q = Output


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Case (continued):

MR (Marginal Revenue) =?

MC (Marginal Cost) =?

Optimal Y? (when MR?MC?).

Profit?


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Case (continued):

MR (Marginal Revenue) =?MC (Marginal Cost) =?Optimal Y? (when MR?MC?).

Profit?

MR = 300 12QMC = 8Q

MR = MC300 -12Q = 8Q


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Case (continued):

300 -12Q = 8Q

-12Q-8Q = -300

-20Q = -30020Q = 300

Q = 300/20 = 15


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Case (continued):

Profit = TR TC

TR = 300Q 6Q2

TR = (300.15) (6.152)

TR =

TC = 4Q2

TC = 4(15)2

TC =

Profit = 2250


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The Fundamentals Of Ir Muhril A M Sc Ph D 34

Homework:

Submit Wednesday June 11, 2008

Suppose that Total Revenue and Total

Cost from an activity are, respectivelygiven by the following equations:TR = 150 + 28Q 5Q2TC = 100 + 0.8Q

a. What level of Q maximizes profit?b. What level of profit maximize?

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Managerial Economics Sahid Pasca the Fundamentals of Managerial Economics

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